Source: This figure now excludes local government financing vehicles. We suggest you multiply by at least 3.25 for this figure, then consider adding a figure for China's shadow banking (loans outside of formal banks)
China’s national debt is the sum of all money owed by the central and local governments of China through the issue of debt instruments. Obligations that are not represented by bonds or bills, such as pension obligations or guarantees to the banking sector or private companies are not included in the national debt figure.
China does not include the debts of state-owned enterprises into its accounts. These businesses, which are controlled either by the central government or by local government represent a very large sector of the economy and banks lend to them in preference to private sector businesses. This credit availability makes state-owned enterprises potential cash cows for unscrupulous managers.
The table below explains what is included in the national debt figure and what isn’t:
Chinese Government Obligation Government Department Included in National Debt?
Government-issued bonds Ministry of Finance Yes
Short-term debt instruments Ministry of Finance Yes
Local government debt None Yes
Public-Private Investment initiatives None No
Civil Service and army pension obligations All No
Debts of state enterprises Various No
Debts of state-owned banks Ministry of Finance No
Guarantees to the private banking sector Ministry of Finance No
Debts accumulated by the governments of Macau and Hong Kong None No
Accounts Payable (unpaid bills) All No
There are two types of public debt instruments in China:
The Chinese central government’s Ministry of Finance is responsible for raising funds for the national government and also supervising debt instruments issued by local governments.
Overall economic activity and public finances are governed by a separate committee, called the Central Economic and Financial Commission. The Ministry of Finance, and even the Minister of Finance is answerable to this committee, which is steered by the President of the Republic, Xi Jinping.
The Ministry of Finance implements policy with respect to local government debt through a series of warnings and encouragements. The central government also controls the financial activities of local governments by issuing guidance to state-owned banks on the loans policy they should undertake with respect to local government.
China’s provinces and local governments enjoy a high degree of autonomy and this extends to their financing. Local government has the right to raise its own funds through the direct issuance of bonds.
Local government debt first became a national issue in 2015 when the country experienced a banking crisis. The central government directed local governments to bail out the banks in their areas by issuing municipal bonds to raise sufficient funds. This issue was largely unsold because the municipal bonds offered a lower return than other investment options in China. The central government then directed state-owned banks to buy the bonds, thus cycling new capital into privately-owned banks through the accounts of local government.
The IMF estimated China’s national debt to be 51.2% of GDP by the end of 2017. However, most of that debt is owed by local government. A 2015 investigation by the Wall Street Journal estimated that China’s local government debt represented a figure equal to 35.5% of the country’s GDP at a total of 18 trillion Yuan. However, more recent reports by domestic news outlets within China put the 2018 figure for local government debt at 16.61 trillion Yuan in April of that year. The country’s central government declared a cap on local borrowing of 20.99 trillion Yuan for 2018.
The figure of 16.61 trillion Yuan works out to $2,432 billion, 20.99 trillion Yuan is equivalent to $3,075 billion. As the country’s estimated GDP stood at $14,092 billion at the end of 2017, the government’s projections for local government debt amount to 21.82% of GDP.
The central government is aware that it is subject to international scrutiny. However, the opportunities for creative debt management seem to be greater in local government. As evidenced by the national government’s bank bailout strategy in 2015, China’s officials seem to like to use a combination of local government financing and the lending policies of state-owned banks to channel a lot of central government actions through the accounts of local government.
An estimate by China’s National Institute of Finance and Development, reported by the South China Morning News in April 2018, revealed hidden debts owed by the country’s local governments. This identified 30 trillion Yuan of debts raised through the derivative markets and other “shadow banking” methods. The Institute also noted a further total of 10 trillion Yuan in obligations that were obscured by lease agreements and other “public-private partnership” techniques. This amounts to an extra 40 trillion Yuan ($5,857 billion) of public debt that is not reported in the country’s national debt figure. That is another 41.6% of GDP, bringing the true debt to GDP ratio for China’s national debt up to 92.8%.
As the finances of China’s state-owned enterprises have never been investigated, it is possible that similar creative fundraising methods have also been practiced by those institutions. The official overall debt-to-asset ratio of government owned businesses stood at roughly 60%, according to a Financial Times report in June 2018. However, at the beginning of 2018 the central government embarked on a policy of forcing state-owned business to deleverage. Compliance with that directive may well have forced those businesses to turn to the shadow banking system to hide their debts in the same manner as local government.
The Ministry of Finance does not advertise its schedule of bond sales, nor does it disclose any other securities that it might use to cover cash flow issues or raise short-term financing.
All government debt is issued in Yuan, which is not convertible to foreign currencies and so there is no interest in these bonds for foreign investors. Similarly, municipal bonds are written in Yuan and not intended for purchase by overseas investors.
Central government bonds are not intended for sale to the general public, but are distributed behind closed doors to the major Chinese banks, which are all state owned.
Municipal bonds are made available to the retail market. However, these are distributed through the state owned banks, who make a bigger effort to attract public deposits through “wealth management instruments.” These schemes are direct lending facilities that enable less attractive private businesses to borrow money at higher than the state-dictated interest rate. The wealth management instruments provide the funds for banks to lend out to these private borrowers and pay higher interest rates to savers than municipal bonds offer. Therefore, most municipal bonds end up on the balance sheets of the state-owned banks.
The majority of Chinese public debt is not officially owed by the central government. However, all of that debt is ultimately guaranteed by the national government of China and should rightfully be recorded in its entirety as the Chinese national debt. The location of those debts are ranked below:
So, an investigation of China’s national debt requires more research at the local government level that in the national government accounts. These figures for total public debt also do not touch upon the undisclosed debts of state-owned banks and state-owned enterprises, which represent a large sector of the Chinese economy.
What facts should you know about China’s national debt?